India: Claiming Both Liquidated Damages And Risk Purchase Costs: A Myth Or A Reality?

I. INTRODUCTION

This article attempts to address a common issue which arises in disputes arising from breach of commercial contracts executed by and between the Principal Employer and the Contractor. In this era of rapid growth and development, timely execution of commercial contracts is of utmost importance. However, in course of performance of contracts, breaches by one party to the prejudice of the other party is also inevitable. Such breach calls for financial compensation to the affected/ aggrieved party for loss or injury by the party in breach in the nature of "damages".

Generally speaking, in case of breach of contract, a sum is awarded to restore the affected party to the economic position the parties expected to be in upon due and proper execution/ performance of the contract. However, it is not practically possible or viable to award damages in such manner and apply it as a straitjacket formula irrespective of the provisions of the contract. The affected party may claim damages with a view to restore itself to the economic position it occupied at the time of execution of the contract or to prevent the party in breach from being unjustly enriched. Apart from the above standard terms of contract, parties while executing modern day contracts agree for predetermined measure of damages in the form of "liquidated damages" to be paid upon breach of the contract by one of the parties. Usually, liquidated damages are quantified and limited to stipulated percentage of the contract value. However, merely because the parties agree to a maximum ceiling limit for claiming liquidated damages, that by itself does not preclude the parties from claiming or recovering damages on other accounts, if otherwise the contract provides for the same and the actual damages suffered is much more.

It is a common myth that in a contract that provides for payment of liquidated damages for its breach, the party complaining of the breach can recover from the party in breach only a reasonable compensation not exceeding the amount of the liquidated damages that has been agreed upon. The judgements of the Supreme Court, namely Fateh Chand vs. Bal Kishan Das1, Kailash Nath Associates vs. Delhi Development Authority2, and ONGC vs. Saw Pipes3, are wrongly relied upon to support the aforesaid myth. However, each of the aforesaid judgments, lays down the law only with respect to awarding damages under Section 74 of the Indian Contract Act, 1872 and do not mention Risk Purchase Costs being claimed under a separate contractual clause and hence do not throw light on the issue whether Liquidated Damages and Risk Purchase Costs may be claimed simultaneously. The proposition of law that the aggrieved party is only entitled to a reasonable compensation which should not exceed the sum of penalty or pre-determined amount which has to be paid after the breach of the contract, may be held to be correct, if the relevant provision of the contract does not expressly or by necessary implication keep alive the right to claim damages under the general law, the right to claim the same may be necessarily excluded.4

However, the above proposition may not hold good when the parties had specifically agreed to imposition of liquidated damages in the nature of penalties for a specific breach, for example, failure to meet specific milestone date or loss of profits or loss of production resulting therefrom. In addition to the provision for Liquidated Damages, subject to the terms of the contract the aggrieved party may be well within his or her rights to recover risk purchase costs/ additional costs and expenses incurred for engaging third parties for carrying out balance work / supply of materials, etc with a view to avoid delay in contemplation and/or mitigate further delay.

Therefore, claiming of Liquidated Damages and Risk Purchase Costs simultaneously is indeed a reality but would necessarily depend upon the terms and conditions of the contract which would essentially govern the right of the parties. But the mere existence of provision for Liquidated Damages in a contract which may provide for a maximum ceiling limit in terms of stipulated percentage of the contract value would per se not be a bar from recovering actual damages incurred under other heads.

II. CLAIM BOTH LIQUIDATED DAMAGES AND RISK PURCHASE

In the aforesaid background, subject to the provisions of the contract,5 Liquidated Damages and Unliquidated Damages (including Risk Purchase costs) both may be claimed for following reasons:

1. Different cause and purpose of Liquidated Damages Clause and Risk Purchase

Clause

Liquidated Damages are penal/ compensatory in nature which is imposed on the Contractor for the delay and damage suffered by the Principal Employer due to such delay in execution of the works under the contract. Additional costs/ Risk purchase costs on the other hand are in the nature of reimbursements claimed by the principal towards costs and expenses incurred for engaging third parties/ purchasing materials from third parties and includes additional costs incurred to avoid delay in contemplation and/ or mitigate further delay. Hence, Liquidated Damages is limited to the damages incurred generally due to delay (once the factum of delay has already occurred) and the other Unliquidated Damages including Risk purchase costs are wider in that sense as it generally relates to all costs and expenses incurred due to default to avoid delay in contemplation and/or mitigate further delay (the factum of delay may not have occurred and is being prevented). Moreover, this is further corroborated by the Supreme Court's holding in Steel Authority vs. Gupta Brothers6, that it may not be the intention of the party to recover for all types of breaches by way of a Liquidated Damages clause.

2. The Indian Contract Act, 1872 itself provides for compensation under the heads of 'loss or damage caused by breach of contract' under Section 73 and 'breach of contract where penalty stipulated for' under Section 74.

The Liquidated Damages component claimed for is under Section 747 in the nature of a penalty for breaching the contract by failing to meet milestones and the remaining component of unliquidated damages may be claimed for under Section 738 as loss suffered or damage caused by breach of contract i.e. direct costs of hiring third party/ purchasing materials which was the known natural consequence of default.

3. No bar in claiming liquidated and unliquidated damages on account of separate breaches concurrently

The Supreme Court in Steel Authority vs. Gupta Brothers9, has held that existence of a Liquidated Damages clause is not a bar to recovery of damages under other clauses under the contract. The Bombay High Court in Oil & Natural Gas Corporation Limited vs. Soconord OCTG and Soconord vs. Oil & Natural Gas Corporation Limited10, has followed the Supreme Court's aforesaid view and in Simplex Infrastructures Limited vs. Siemens Limited & Anr.11, has noted that reimbursements of payments made on behalf of the Contractor is separate from Liquidated Damages. Similarly, the Delhi High Court in M/s Saraya Distillery vs. Union of India and Anr.12, has noted that there can be different remedies 'without prejudice to each other' under the contract for different breaches of the contract, for instance, right of repurchase (loss claimed on account of repurchase) and right of the purchaser to recover damages for breach of the contract.

Hence, in view of the foregoing judgments it is fairly settled that there is no bar that once there is a Liquidated Damages clause in respect of a particular claim, damages cannot be awarded although they arise on account of another claim albeit under the same contract.

4. Ceiling on Liquidated Damages not applicable to Damages claimed on another account

The Bombay High Court in Oil & Natural Gas Corporation Limited vs. Soconord OCTG and Soconord vs. Oil & Natural Gas Corporation Limited13, has held that if a Liquidated Damages clause stipulates a ceiling on account of delay in delivery then such a clause would not prevent a party from claiming damages on account of the goods supplied under the contract being defective. Hence, in furtherance of the legal principle that Liquidated Damages and Risk Purchase costs may be claimed simultaneously, it is only fair that the ceiling provided for the claim on account of Liquidated Damages is not made applicable to the claim on account of Risk Purchase costs.

III. CONCLUSION

It is a settled position of law that for interpreting a provision of a contract, the intention behind execution of the contract by the parties is sacrosanct and needs to be determined. If the parties to a contract, out of their own free will and volition agreed to concurrently apply different provisions of the contract within their ambit for dealing with different breaches, the provision for liquidated damages stipulating a maximum ceiling limit would be construed merely as one of the modes to recover damages for a specific breach only. Such a provision would not act as a bar in a case where the contract itself provides for and allows the affected party to claim damages under various other heads including – Risk Purchase Costs/ Additional Costs in addition to and apart from the stipulated Liquidated Damages. Therefore, Liquidated Damages and Other Damages (Unliquidated) such as Risk Purchase costs/ Additional Costs both can be claimed simultaneously and the ceiling on Liquidated Damages claim cannot be made applicable to claim of damages under other heads.

Footnotes

1. (1964) 1 SCR 515

2. (2015) 4 SCC 136

3. 2003 (5) SCC 705

4. Sir Chunilal V. Mehta and Sons Ltd. vs. Century Spinning and Manufacturing Co. Ltd., 1962 Supp. (3) SCR 549

5. In situations where provisions of the contract between the parties reveal that the parties agreed to claim for liquidated damages or risk purchase then the intention of the parties crystallized into the words of the contract will prevail. An example of such a clause is as follows:

Failure and termination: If the contractor fails to deliver the stores or any Installment thereof within the period fixed for such delivery or at any time repudiates the contract before the expiry of such period, the Secretary may without prejudice to the right of the Purchaser to recover damages for breach of the contract:

(I) recover from the contractor as agreed "liquidated damages" and not by way of penalty a sum equivalent to 2% of the price of any stores which the contractor has failed to deliver within the period fixed for delivery in the schedule for each month or part of a month during which the delivery of such stores may be in arrears where delivery thereof is accepted after expiry of the aforesaid period, or

(II) purchase or authorise the purchaser elsewhere without notice to the contractor, on the account and at the risk of the contractor of the stores not go delivered or others of a similar description (where stores exactly complying with particulars are not in the opinion of the Secretary, which shall be final, readily procurable) without cancelling the contract in respect of the Installments not yet due for delivery, or

(III) cancel the contract or a portion thereof and if so desired purchase or authorise the purchase of the stores not so delivered or others of a similar description (where stores exactly complying with particulars are not in the opinion of the Secretary, which shall be final, readily procurable) at the risk and cost of the contractor. If the contractor had defaulted in the performance of the original contract, the purchaser shall have the right to ignore his tender for risk purchase even though the lowest.

[See Henrys Clerks Co. vs. Union of India, ILR (1980) II Delhi, para 7. Please note that in this case the Delhi High Court did not comment on the issue of whether liquidated damages and risk purchase both can be claimed simultaneously.]

6. 2009 (10) SCC 63, paras 21 to 26

7. Section 74: Compensation for breach of contract where penalty stipulated for:

When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Explanation- A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

Exception- When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 1*[Central Government] or of any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.

Explanation. - A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested".

8. Section 73: Compensation for loss or damage caused by breach of contract:

When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract - When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.

Explanation - In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.

9. Ibid.

10. 2014 SCC Online BOM 1277, paras 28, 43-46

11. 2015 (5) MhLJ 135, paras 4, 13

12. AIR 1984 Del 360, paras 2-3, 8-9, 11-12

13. Supra note 10.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Singhania & Partners LLP, Solicitors and Advocates
Singh & Associates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Singhania & Partners LLP, Solicitors and Advocates
Singh & Associates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions